Background Information

In this assignment you will complete problems using Excel and the analysis tools in capital budgeting. The methods that will be completed are net present value (NPV), payback and discounted payback, average accounting return (ARR), internal rate of return (IRR) and modified internal rate of return (MIRR), and profitability index (PI). In most of your calculations, you will apply concepts learned in the time value of money. These calculations will provide a basis for determining whether to accept or reject a project.

Instructions

 

1.      Review Chapter 9 in Fundamentals of Corporate Finance, and the Chapter 9 – Net Present Value and Other Investment Criteria PowerPoint.

2.      Using Excel, complete the following problems in your textbook:

a.       Net Present Value: Problem 8 on page 300

b.      Payback and Discounted Payback: Problems 3 and 4 on pages 299

c.       Average Accounting Return: Problem 6 on page 300

d.      IRR and MIRR: Problems 7 and 19 on pages 300 and 302

e.       Profitability Index: Problems 15 and 16 on page 301

 

#8).  Calculating NPV [ LO1] For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return is 25 percent?

 

#3 & #4).

3.       Calculating Payback [ LO2] Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?

Year    Cash Flow(A)    Cash Flow(B)

_______________________________________

0         -$60,000             -$70,000

1            23,000                  15,000

2            28,000                  18,000

3            21,000                  26,000

4             8,000                 230,000 

 

4.       Calculating Discounted Payback [ LO3] An investment project has annual cash inflows of $ 3,200, $ 4,100, $ 5,300, and $ 4,500, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is $ 5,900? What if the initial cost is $ 8,000? What if it is $ 11,000?

 

#6).Calculating AAR [ LO4] You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $ 12 mil-lion, which will be depreciated straight- line to zero over its four- year life. If the plant has projected net income of $ 1,854,300, $ 1,907,600, $ 1,876,000, and $ 1,329,500 over these four years, what is the project’s average accounting return (AAR)?

 

#7).Calculating IRR [ LO5] A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project?

                                                    Year        Cash Flow

0                     (-)$28,000

1                           12,000

2                           15,000

3                           11,000

 

#19).MIRR [ LO6] Slow Ride Corp. is evaluating a project with the following cash flows:

Year          Cash Flow

0           (-)$29,000

1           11,200

2           13,900

3           15,800

4           12,900

5       (-)9,400

The company uses a 10 percent interest rate on all of its projects. Calculate the MIRR of the project using all three methods.

#15 & #16).

 

15.Calculating Profitability Index [ LO7] What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?

 

Year            Cash Flow

 

0                                           (-)$18,000

1                                                  10,300

2                                                  9,200

3                                                  5,700

 

 

 

16.Problems with Profitability Index [ LO1, 7] The Angry Bird Corporation is trying to choose between the following two mutually exclusive design projects:

 

 Year             Cash Flow ( I)           Cash Flow ( II)

0                            (-)$64,000           (-)$18,000

1                                  31,000                   9,700

2                                  31,000                   9,700

3                                  31,000                   9,700

 

a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept?

 

b. If the company applies the NPV decision rule, which project should it take?

 

 

c. Explain why your answers in (a) and (b) are different.